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Explicit Costs
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Input costs that require an outlay of money by the firm
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Implicit Costs
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No outlay of money, but profit that may have been forgone
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Economic Profit
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Total revenue minus total cost, including both explicit and implicit costs
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Implicit Cost of Capital
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The opportunity cost of the use of one's own capital - the income earned if the capital had been employed in its next best alternative use
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Accounting Profit
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Total revenue minus total explicit cost
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Normal Profit
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Economic profit of 0 - the level of profit that allows a business to survive and grow
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Optimal Output Rule
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Profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost
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Marginal Revenue
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The additional income from selling one more unit of a good; sometimes equal to price
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Marginal Revenue Curve
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Shows how marginal revenue varies as output varies
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Marginal Cost
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Extra cost of producing one additional unit of production.
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Marginal Cost Curve
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Shows how the cost of producing one more unit depends on the quantity that has already been produced
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The Principle of Marginal Analysis
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Every activity should continue until marginal benefit equals marginal cost (or if there is not an exact point where this happens, get as close to 0 as possible)
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Production Function
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The relationship between quantity of inputs used to make a good and the quantity of output of that good
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Short Run
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the period of time during which at least one of a firm's inputs is fixed
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Fixed Input
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Production factor that cannot be varied
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Long Run
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The time period in which all inputs can be varied
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Variable Input
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Any resource for which the quantity can change during the period of time under consideration
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Total Product Curve
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Shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input
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Marginal Product
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The increase in output that arises from an additional unit of input
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Diminishing returns to an input
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The effect observed when an increase in the quantity of an input, while holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.
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Total Cost
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The sum of fixed and variable costs
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Fixed Costs
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Costs that do not vary with the quantity of output produced (a factory)
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Variable Cost
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A cost that rises or falls depending on how much is produced (workers)
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Average Total Cost/Average Cost
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Total cost divided by the quantity of output produced
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Shape of Average Total Cost Curve
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U-shaped
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Average Fixed Costs
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Fixed cost divided by the quantity of output (will get smaller and smaller)
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Average Variable Cost
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Variable cost divided by the quantity of output produced (gets greater and greater)
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Spreading Effect
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The larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost
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Diminishing Returns Effect
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The larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost.
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Point of Minimum Cost Output
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Bottom of a U-shaped ATC curve, the point at which ATC is smallest. Also the point where the marginal cost curve crosses the average total cost curve.
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Initial downward slope of the marginal cost curve is caused by
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Specialization of workers, but this will eventually stop and the curve will go upward, giving it a shape like the nike swoosh
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Average Product
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The total product divided by the quantity of the input
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Average Product Curve
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Shows the relationship between the average product and the quantity of the input
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By accepting a higher fixed cost, a firm can
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Lower its variable input cost for any given output level
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Long run ATC Curve
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Shows the relationship between output and ATC when fixed cost has been chosen to minimize ATC for each level of output. Each short run ATC curve shows a certain level of production, and the minimum cost outputs of multiple short run curves will create the points on the long run ATC curve
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Economies of scale
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When long run ATC decreases as output increases
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Diseconomies of scale
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When long run ATC increases as output increases
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Increasing returns to scale
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Given that all inputs are increased by the same proportion, when output increases by a larger proportion than the inputs (all inputs inc. by 3x, output increased by 4x)
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Decreasing returns to scale
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Given that all inputs are increased by the same proportion, when output increases by a smaller proportion (all inputs inc. by 3x, but output only increased by 2x)
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Constant Returns to scale
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When long-run average total cost is constant as output increases
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Sunk Costs
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Costs that have already been incurred and cannot be recovered
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The Marginal Product Curve will be an upside down "U" because
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The diminishing returns of labor
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